Romney, Bain an example of success not copied in Washington

January 18, 2012|By Richard Klitzberg

Mitt Romney, the leader in Republican presidential polls, has been ripped in the media, by his Republican challengers, and by the White House for being the incarnation of Gordon Gekko, the evil financial manipulator of the movie "Wall Street." The charges stem from Romney's former status as CEO of Bain Capital, a Boston-based "private equity" firm that manages over $60 billion, most dedicated to corporate buyouts.

Unfortunately, the public and many Romney critics have little understanding of these transactions and the vital role they play in keeping Corporate America efficient and competitive.

Private equity (or leveraged buyouts) involves the purchase of under-performing, financially challenged companies, both public and private, by private investment partnerships formed to turn them around to profitability. These firms raise assets by convincing large institutions and wealthy families of their expertise in such matters.

Additionally, they often borrow supplemental capital from banks and insurers on the same promise. In buying troubled companies, firms like Bain, populated by teams of lawyers, financiers, accountants and industry experts, seek out target companies that they believe can be reconfigured, reenergized and returned to profitability.

Bain must be very exacting in its analysis of how much to pay for a target company because overpaying will seriously diminish the potential for attractive returns for their investors. Once the company has been revived and the capital markets permit, the newly-healthy enterprise will be sold, most often via a public offering.

Most target companies are involved in mundane manufacturing or service sector pursuits that are not experiencing growth (Google is not a candidate for an LBO). Indeed, many targets are in industries being cannibalized by the failures of competitors exhibiting poor management, weak finances and little new in technology or product innovation. In effect these companies can no longer compete.

To save them, the buyer will often have to downsize the current management, lay off redundant employees, cut expenses, alter budgets, limit travel expenses, even lower contributions to benefit funds, so as to save money and make the company a leaner, more efficient entity. Note that the above managerial skills are never evidenced in Washington, D.C.

If Bain, and firms like them, are successful and the buyout turns around, this process creates new products and services, or new technologies, etc. Bain will re-grow the business, to include new hirings (as they did with Staples and Sports Authority, which created 140,000 new jobs) and may reap outsized returns.

If they fail, the risk of which is significant, the company will likely declare bankruptcy, be reorganized again or may cease operations entirely at which point Bain loses everything. Make no mistake, the private equity world is fraught with risk and is surely not for the uninitiated.

What is ironic about the Romney-Bain vendetta is that much of Bain's money comes from state and local pension funds, labor unions and non-profit organizations, many of which are dramatically underfunded and desperately in need of substantial investment profits to help pay their future obligations. Teachers, firemen, steel workers, hospital personnel, professors, musicians and others among "the 99 percent" who aren't rich all have pieces of their retirement funds invested in private equity. All have suffered through ten years of poor stock and bond market returns and frightening market volatility.

In many instances it has been the "non-traditional" portions of portfolios, such as private equity and hedge funds (private partnerships that invest in and trade stocks, bonds, currencies and futures, etc.) that have driven satisfactory performance for such investors. Without those profits their obligations would be even more daunting, but one would not glean that from the level of animus directed at Romney-Bain.

Romney rebukes from the White House are especially galling. Mr. Obama effectively LBO'ed our automobile industry to help his union backers. He played venture capitalist and lost $500 million of our money, not private capital, in Solyndra. America has lost 1.6 million jobs on his watch. He has loaded up our children with $6.2 billion in new debt. He has failed to turn around our postal service, Amtrak and a dozen other failing agencies that bleed us annually, but attacks Romney for saving dying companies and making himself rich.

In a world where governments are downgraded and faltering, bloated with uninspired workers seeking early retirement and greater benefits, it is perverse that nasty politicians, few of whom have tested their skills in the private sector, should promote an anti-capitalist message to an unsophisticated electorate. Only now in America can a man's success be seen as a failing.

Richard Klitzberg is president of Klitzberg Associates, Inc., based in Princeton, N.J., and Boca Raton. The firm raises capital for hedge funds and private equity.